Introducing the Concept of “Invested Yield”

Originally published: September 7th, 2015

10/16/15 – Editor’s Note – Since writing this article, I’ve learned that I didn’t invent this concept. The accepted term is “Yield on Cost” or YOC. Investopedia definition here: http://www.investopedia.com/terms/y/yield-on-cost.asp 

I guess I knew deep down that I hadn’t invented it, but so few people discuss the performance of their investments in terms of this metric. As with just about any topic there is apparently quite a bit of debate about whether “Yield on Cost” is a “useful” metric or simply a “feel good” metric. I found an intriguing article in favor, but of course it puts it in the context of someone who’s already retired. The author also has decided to use his own term for it, so I will use my own term too, thank you very much. If you have nothing better to do, there is a lot of anonymous, dogmatic internet shouting in the comments section: http://seekingalpha.com/article/2470375-yield-on-cost-a-vitally-important-consideration-for-retired-investors

I’m not rewriting the article. Here it is as originally written:

As much as I take my cues from established investment theories, philosophies and practice, my personal investment adventure is unique to me. As such there are elements to my strategy that aren’t conventionally discussed. Maybe they aren’t discussed because they’re not important, and I’m just crazy. Or maybe I’m onto something. Time will tell.

This brings me to a made up term, that I consider crucial to evaluating my investing success. I call it: “invested yield”. A cursory google search came up empty, with most of the links discussing total return or return vs yield or whatever. So I think I will go ahead and take credit for this one.

A definition: “Invested Yield” is the interest or income expected from a given investment expressed as a percentage of the original investment amount.

Formula: [Income ($) / Invested Amount ($)]*100%

Two examples from my own very young portfolio:

Example #1 – Adventures in Costco (COST)

  • On 2/11/2014 I purchased $100 worth of COST at $114.29/share (0.8750 shares) using my brokerage’s automatic investment plan ($3.95 commission)
  • On 2/28/2014 I was paid $0.27 in dividends which was automatically reinvested at $117.39/share (0.0023 shares) – no commission for automatic dividend reinvestment
  • On 3/24/2014 I purchased 13.00 shares at $113.12/share for $1,477.51 ($6.95 commission – market order).
  • On 5/30/2014 I was paid $4.93 in dividends which was automatically reinvested at $114.12/share (0.0432 shares) – no commission for automatic dividend reinvestment
  • On 7/25/2014 I was paid $4.94 in dividends which was automatically reinvested at $118.18/share (0.0418 shares) – no commission for automatic dividend reinvestment
  • Sometime after 7/25 and before the next dividend payment on 11/28 I turned off automatic dividend reinvestment, and have been collecting dividends as cash ever since.

So I now own 13.9623 shares of COST. I invested a total of $1,587.65 including dividends. This represents a cost basis of $113.71/share

The market value of COST at time of writing is $138.48/share. The current annual dividend is $1.60/share (this is the current projected annual dividend. Costco likes to randomly reward shareholders with special dividends like they did in February of 2015, but these can’t be counted on or predicted).

So the market yield is $1.60/$138.48 or 1.16%. But my invested yield is $1.60/$113.71 or 1.41%.

In other words I am currently getting 25 basis points better yield on my investment than the schmucks who are buying COST today. Most of this is related to my cost basis versus the current stock price, and is a key point about dividend growth investing. I get the same dividend per share as everybody else…regardless of what I paid for the stock. The other part of the story is that the quarterly dividend increased from $0.31/share in February 2014, to $0.355/share in May 2014 and then again to its current $0.40/share in April of 2015.

I can look at my investment in COST a number of different ways, all of which are positive. I have a paper gain of over 20% because the share price has increased that much over my cost basis. It has netted me $90.89 in cash dividends since I stopped automatically reinvesting (including a special one-time only $5/share dividend on 2/27/15). Or I could focus on the fact that I enjoy a 0.25% better yield than the market.

Example #2 – Adventures in ARCP (now VER)

  • On 10/20/2014 I purchased 120 shares of ARCP at $12.02 for $1,448.75 ($6.95 commission – market order)
  • On 10/29/2014 After ARCP unveiled accounting irregularities I purchased another 100 shares at $8.92 for $898.94 ($6.95 commission – market order)
  • Dividends were never automatically reinvested in this investment. I was paid a total of $36.66 in dividends ($0.0833333/share monthly dividend for 2 months: November and December 2014).
  • Dividends were then suspended indefinitely pending resolution of the accounting kerfuffle.
  • On 07/31/2015 ARCP changed its ticker to VER and my stocks were converted 1:1 from ARCP to VER

So I now own 220 shares of VER. I invested a total of $2,346.94. This represents a cost basis of $10.67/share.

The market value of VER at time of writing is $8.00/share. The current annual dividend is $0.55/share based on the recently declared quarterly dividend. (The company is in the midst of a re-branding campaign. They shit-canned most of the C-suite, hired new leadership and went back and redid the books for the past couple years. On 08/05/2015 they declared a quarterly dividend of $0.1375/share payable to shareholders of record on 9/30 and 12/31/2015.)

So the market yield is $0.55/$8.00 or 6.88%. But my invested yield is $0.55/$10.67 or 5.15%.

In other words, this schmuck is getting 165 basis points lower yield on his investment than people who buy the stock today.

The same is true as for COST, but it’s not as rosy a picture for this guy. I get the same dividend per share as everybody else…regardless of what I paid for the stock. Unfortunately my cost basis is more than 24% over market value. Add to that, everybody’s dividend has been nearly halved after they went back and recalculated the actual AFFO as opposed to the imaginary number the crooks before had come up with.

I could look at my investment in ARCP now VER a number of different ways…most of which are negative. I’m showing ~25% paper loss on the stock price. I’ve only collected $36 in dividends in a year. My invested yield is considerably lower than the market yield, and I own 220 shares of a questionable REIT that has a lot of good will to make up after upper management openly lied to shareholders and the SEC (this is the primary reason the market yield is as high as it is).

So what’s the point of all this? Invested yield is the only yield that really matters. Paper gains or losses are not real (unless of course you sell and make them real). Market yield only represents the yield you can expect if you bought the stock at current market price.

There are a number of ways to value a stock, the dividend discount model (DDM), which is my preferred method of valuation, assumes that a stock is only worth the dividends it pays you.  If this is true, then a good investment is an investment whose “invested yield” increases over time and exceeds the “market yield”.

If the stock price and/or dividend amount goes down to the point where the market yield exceeds your invested yield, the investment has to be considered a loser.  Just because it’s a loser doesn’t mean you sell it, but you have to realize and accept that you didn’t beat the market.

“Beating the market” in terms of paper gains is a stupid way to evaluate investment success. It’s not a real gain or loss until you sell. And besides what market do you want to compare yourself to?

“Beating the market” in terms of “total return” is impossible to calculate, because stocks are being bought and sold every day at all kinds of different prices. The only way to calculate total return is to add up actual gains, and who’s to say which buy or sell point you should use when you compare yourself to the market?

“Beating the market” in terms of “invested yield” is a very real comparison. When you get paid a dividend it shows up as real cash money in your account. It is not a “paper” gain. The percentage of that real monetary gain in terms of your original investment is an unavoidable reality and it’s either better than the current market or it is not.

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